Is It Time To Fractionalize Global Infrastructure Assets? (This Bold Startup Thinks So)
A new infrastructure fin-tech company, Fasset, has a bold vision for tokenizing real assets to solve the $15 trillion infrastructure spending gap–one that is already addressing trade friction and illiquidity issues for projects in emerging economies.
The company, which officially launched this summer and is headquartered in London, says fractionalizing the ownership of essential, hard assets like bridges, roads, wind farms, and electrification grids on an Ethereum-based blockchain technology platform will let developers more easily exit (and reinvest in new) infrastructure projects, improve liquidity and asset values for buyers and sellers alike.
This, in turn, should incentivize the buildout of sustainable infrastructure in developing economies, which will need to invest some $2 trillion per year over the next 15 years just to keep pace with projected GDP growth.
Fasset’s founder, Mohammad Raafi Hossain, is a former technology advisor to the United Arab Emirates Prime Minister’s Office, and launched his firm earlier this year with seed capital from family offices in the UAE, Saudi Arabia, Bahrain, Kuwait and Singapore.
“When we think about infrastructure, we typically think of big projects with big ticket sizes that are invested in by large sovereign wealth funds, so everything is…happening at an extra-large size, which either disincentivizes or prevents investors of varied sizes from entering the market,” Hossain explains. “The larger the fund, the longer it takes for an investment to happen. While there is liquidity at the sovereign wealth fund level, the transaction time and sell cycle is extremely long. Medium-sized family offices or institutions can act quickly, but even for them, the ticket sizes are too large.”
A newly powerful market segment
Hossain points to the recent years’ dramatic surge in family office creation in the GCC, Middle East and in Southeast Asia regions, with AUMs in the range of $50–250 million. This investor segment is interested in direct infrastructure investment and eager for ESG exposure, but the minimum ticket size associated with typical projects, which involve some kind of sovereign off-take or power purchase agreement, dwarf even their own considerable resources.
All of the family offices backing Fasset belong to veteran financial executives from the region, with first-hand experience of the “pain points” of investing in cross-border, frontier infrastructure projects. And all are enthusiastic about opening up the classically illiquid, high-barrier-to-entry asset class to a larger investor pool.
The firm is overseen by an advisory board that includes David Vicary Abdullah, former CEO of Hong Leong Islamic Bank; Mohammed Al-Hokal, board member of the National Commercial Bank, Saudi Arabia’s largest bank by total assets and second-largest by market capitalization; and Dr. Nahed Taher, President of National Standard Finance — a leading infrastructure and sovereign finance organization — and the first female CEO of a bank in the Saudi/GCC banking markets.
Besides opening the market to new capital inflows by fractionalizing these assets to enabling investors to buy into these hard assets in small-share increments, there is a compelling return profile as well. Hossain points to a 2016 study cited by the International Institute for Sustainable Development (an independent, sustainable policy think tank) which found that a selected, tokenized basket of European real estate assets showed 40% higher net asset value against a comparable set of privately held properties over a five-year period: a disparity attributable to the liquidity premium offered by buyers seeking a frictionless environment.
“When we looked at that study, we felt that another place where this could come into maximum effect is infrastructure, where the investor audience is so small, the pressure on price that a sovereign wealth fund can put on an infrastructure asset is extreme, because there just aren’t a lot of investors,” Hossain explains. “By crowding in more investors of different sizes, there should be a move to a more symmetrical information environment, where prices should benefit asset owners. From an investor’s perspective, getting yield that you were previously unable to get should also be attractive.”
Token, platform, exchange
Fasset–the-company–is built around a clutch of products. First is the Fasset Enterprise Platform, the technology platform that allows a hard-asset owner to raise capital by tokenizing an asset, and digitally “animating” a blockchain contract conferring fractional ownership in the asset.
To tokenize an asset, the asset owner will pay a tokenization fee denominated in Fasset Governance Token (FGT), Fasset’s native token. FGT is imbued with strong economic and governance utilities, and will be used on Fasset Enterprise Platform and Fasset Exchange, both of which are currently live.
FGT is backed by several value-capture mechanisms. These include governance rights, the ability to vote on key proposals and rules governing the protocol after the decentralized protocol is ready. Second is the ability to earn staking rewards (passive income earned through holding some crypto assets) from the protocol’s inflationary monetary policy. Third, FGT is a trading discount medium, as it can be used to reduce trading fees on the Fasset exchange. And finally, FGT serves as a fee medium, as tokenization fees generated from the Fasset Enterprise Platform (FEP) will be automatically converted to FGT,
Ideally, Fasset Governance Tokens — released yearly in limited, predetermined quantity — will also appreciate in value as network effects on the asset platform increase. This creates a non-linear incentive for investors who draw yield from the underlying asset as well as a return on the Fasset Governance Token.
Token holdings indexed to underlying assets will include voting rights on decisions pertaining to those assets. Greater concentrations of token ownership confer more voting power, so a powerful token investor, for example, could vote for more retrofitting of conventional power plants in Europe in order to become more sustainable.
Eventually, Fasset Governance Token ownership could be used to offset carbon emissions elsewhere in an economic structure. Investors with lower-conviction views on the asset’s governance could also transfer their voting rights to more zealous activists through a passive investor protocol enabled by ethereum.
What makes a perfect tokenized asset?
Hossain explains that from a sector perspective, many family offices are actively seeking ESG investments, and ESG is well-placed in resilient infrastructure assets that are core to a municipality, state or region.
Fasset’s priorities in identifying suitable assets are twofold: first are sustainable infrastructure assets that meet the ESG requirements of family offices, and second is risk mitigation. Especially given the newness of digital tokenization to financial markets, the ideal target for fractionalization is a brownfield asset with an established operational history, and for which a safe off-take agreement is already in place.
Tokenization can add value to newer energy generation and storage assets as well, he explains. Consider a renewable power plant with some operational history, where the developer wants to exit, but is limited by a lock-in period before liquidating the equity position and moving on to the next project. Fasset is well positioned to speed up the return of the developer’s liquidity by fractionalizing the asset and crowding in investors from a broader base.
Fasset is currently in the process of tokenizing four brownfield assets across different jurisdictions. One of these is a wind farm in Pakistan, which was put into operation a few years ago by a developer who is now seeking government tenders for other wind farms. With one successfully completed project and hopes for more, this developer can either seek traditional financing to build the next farm, or liquidate part of the equity position in the current farm, thus lowering his cost of capital for the next project.
Speedier, frictionless transactions can also make it more attractive for well-capitalized foreign institutions to invest in emerging market infrastructure by refinancing transactions in different permutations of crypto, commodity and straight fiat currencies, while also bypassing some of the longtime constraints of infrastructure investing.
“Think about a renewable national grid project in Zimbabwe, which doesn’t necessarily have a local currency, but we know that a national grid is essential, core infrastructure to any country. It’s a very resilient asset, and it’s a much needed asset. Electrification of a country like Zimbabwe is extremely critical from an SDG [U.N. Sustainable Development Goals] perspective, and it’s healthy from a return perspective,” Hossain says. “By combining some of the return potential of the Fasset Governance Token…and the transfer-of-funds potential with Bitcoin or Ethereum or with even U.S. digital dollars — we’re making Zimbabwe into a more investor-friendly market that was simply impossible to do before.
“Even to transfer funds from an institutional investor — let say, from Manhattan — to Zimbabwe? That’s extremely difficult. And to repatriate those funds? Good luck. It could take time. But to be able to do that in parallel to the financial system, on Blockchain, where the intermediary is not a bank, it’s a decentralized protocol, and where as long as you’re meeting certain KYC [Know Your Client] requirements, the transfer of funds takes no time, and the ability to bring in non-linear incentives makes Zimbabwe into a more investor-friendly place.
Hossain says the robustness of the Ethereum protocol — its system of smart contracts — makes it well-suited for legal and regulatory issues specific to infrastructure investment. Under the ERC 1400 Ethereum protocol, Fasset can programmatically encapsulate ownership certificates of equity within actual tokens. This enables financial regulators, who will require robust KYC and Anti-Money-Laundering (AML) provisions, the ability to monitor fund and ownership flows, and to reverse any suspected illicit transaction, greater transactional oversight.
Full regulatory embrace of these technologies may not be far off. In 2017, London-based capital markets tokenizer Nivaura successfully cleared, settled and registered a securitized, Ethereum-denominated bond on a blockchain platform. And in March of this year, German multinational automaker Daimler AG issued the first fully digital and legally recognized Schuldschein (corporate bond).
Hossain says demonstrating legal enforceability and a high security threshold will be key. Once the U.K.’s Financial Conduct Authority recognizes blockchain-enabled transfer of physical asset ownership, he expects investment activity to increase dramatically.
The change to emerging markets infrastructure investment could be transformational, even within the next five years, by which time Fasset hopes to offer a currency mode for actual infrastructure project finance.
“In five years’ time, let’s say there’s a developing market government that denominates a greenfield renewable power plant in what we call the infrastructure-backed dollar,” says Hossain.
“So this government says, ‘We will tender a purely digital investment in a native digital currency, and the yield will also be paid to these investors in the same digital currency. [So] you have a government denominating a new project in a digital currency, yield is also paid in a digital currency, and incoming investments are going to be paid digitally. What an amazing frictionless environment [in which you] can you unearth a real asset that exists in the real world, but through digital investments that are not linked to currency risk, any sort of banking risk, in the sense of…cross-border risk. Combining that with our nonlinear incentives of FGT, [these are] amazing possibilities. If we can get to that point in five years, then we’ve made enough of an impact that we can be proud of.”